The Great Corporate Tax Heist

August 12, 2008

Robert Borosage

Remember the old Steve Martin routine on how to make a million dollars and not pay taxes: “First, make a million dollars… Second, don’t pay taxes.” Turns out Martin’s joke is standard operating procedure for corporations in the United States — only, in comparison, Martin was a piker.

Today, the General Accountability Office (GAO) released a study on taxes paid by corporations. In what Sen. Byron L. Dorgan, D-N.D., mildly called “a shocking indictment of the current tax system,” the GAO found that about two-thirds of corporationsoperating in the U.S. did not pay taxes annually from 1998 to 2005.

Now most corporations in America are start-ups or small, mom-and-pop operations that have adopted a corporate form to lower their tax rates. And a greater percentage of large corporations do pay some taxes. But in 2005, with corporate profits reaching new heights as a percentage of national income, the GAO found that 28 percent of large corporations paid no taxes. (It defined large corporations as those with assets of at least $250 million dollars or gross receipts of at least $50 million dollars.) They can tell you how to make $50 million dollars and not pay taxes.

Not surprisingly, the income collected from corporations has been declining as a percentage of gross domestic product, with the burden transferred to your income and payroll taxes. According to a study by the Treasury Department, from 2000-2006, an average of 2.2 percent of GDP was collected in corporate taxes. This compares to an average of 3.4 percent in other industrial countries. The nonpartisan Congressional Budget Office projects that, under current law, corporate revenues will decline to 1.9 percent of GDP by 2017.

Why is this important? Well, the Bush Administration, led by Treasury Secretary Henry Paulson, and conservatives, led by John McCain, are mounting a major campaign to cut the corporate tax rate even more, arguing that we are crippled competitively by having a U.S. rate higher than any industrial nation other than Japan. “America has the second highest business [tax] rate in the entire world,” McCain says. “Is it any wonder that jobs are moving overseas? We’re taxing them out of the country.”

But the GAO study confirms what we already knew: Whatever the nominal tax rate, U.S. corporations pay an effective rate among the lowest in the industrial world.

Yet the core of McCain economic agenda consists of breathtaking corporate tax breaks. He calls for cutting the top corporate rate from 35 percent to 25 percent and allowing corporations to write off investments in the first year. Combined, the Tax Policy Center wonks cost these at over $1.3 trillion over 10 years. Len Burman at the Tax Policy Center estimates that in total, McCain would cut corporate revenues by about 50 percent from current levels. They’ll be making hundreds of millions of dollars and not paying taxes. This is no joke.

Paying for these tax breaks, sustaining the Bush tax cuts, adding more tax breaks AND balancing the budget in four years, as McCain promises, will require heroic cuts in spending. Not military spending; McCain promises to increase that. How will he do this? On the stump, McCain promises to veto any earmarked spending. But that is a gesture, providing about $18 billion a year. (And he isn’t exactly consistent. McCain often tells folks who defend a local project that it is the process, not the individual project, that he opposes.) Perhaps that’s why McCain calls for raising Medicare taxes on seniors with over $50,000 a year in income and taxing employer-based health care benefits for families. Working people and seniors will help pay the tab for the corporate tax giveaway.

It’s hard not to wonder about the pure contrarian inanity of the current conservative position. Our military is by far the strongest in the world, while our trains are among the slowest and our sewers are collapsing. So they propose raising spending on the military and cutting domestic investment. We suffer Gilded Age inequality, with the wealthiest 15,000 families — one-one hundredth of one percent of the population — capturing fully one-fourth of the entire income growth from 2000 to 2006. Their average income rose from $15.2 million per year to $29.7 million per year. Meanwhile, the rest of us — 133 million households that make up 90 percent of the country – divided up 4% of the nation’s income, adding about $305 to our average $30,354 income. So conservatives push for more tax cuts for the wealthy, while proposing to tax employer based health benefits. Corporate profits (prior to the recession) have catapulted to what is by far the highest percentage of national income in the past half century. So they want to cut corporate taxes, inevitably increasing the burden on labor. The economic future looks dim because consumers, drowning in debt, are cutting back. So they suggest cutting taxes on corporate investments will generate new investments and growth — as if companies don’t need someone to buy the products they make.

Maybe that will be Steve Martin’s next routine: How to sell more stuff and not have customers. Somehow, it doesn’t sound so funny.

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About Robert Borosage

Robert L. Borosage is a senior advisor to People's Action and writes widely on political, economic and national security issues. He is a Contributing Editor at The Nation magazine, and his articles have appeared in The American Prospect, The Washington Post, the New York Times and the Philadelphia Inquirer.